Tag Archives: economics

The Great Compression

In a recent newsletter, Paul Krugman referenced a 1991 economics paper in glowing terms. He said that he’s read many economics papers during his career, but very few that changed the way he sees the world.

This one, evidently, did.

Krugman began his discussion by reminiscing; as a Baby Boomer, he’d grown up at a time when extremes of wealth and poverty were far less pronounced than they are these days–a time when middle managers and better-paid blue-collar workers were more or less  financial equals. It was a time, as he reminds us, when  C.E.O.s of major companies were paid “around 20 times as much as the average worker, compared with more than 200 to 1 today.”

Although female and Black workers certainly weren’t equal, the extremes of wealth we see today–the enormous gap between the rich and the rest– were inconceivable, and the middle class was substantial. (I still remember a long-ago political science class that attributed national stability to the existence of a sizable middle-class, among other things.)

And we took it for granted. A more or less middle-class society, almost everyone assumed, was the state toward which an advanced economy naturally evolved.

Not so much, we learned as the boomers turned middle-aged. The future of inequality wasn’t what we expected it to be; America today has more or less returned to Gilded Age disparities in income and wealth.

The question, of course, is “why did this happen? Why isn’t the future of inequality what we expected?

The paper he was praising–“The Great Compression”– was written by Claudia Goldin and Robert Margo, and it showed that,  as Krugman put it,  America had gone to bed in 1939 in the Gilded Age and woke up in 1945 as the middle-class nation of his childhood, where wages were–as the paper labeled them–“compressed.”

Some of the reasons for that compression of wages are obvious:  World War II required a controlled economy. Wage increases were regulated– and the rules tended to be more generous to less well-paid workers. But those rules, and the economic controls, were lifted after the war.

Why didn’t things spring back to where they had been before once wage and price controls had been lifted?

One answer, as Krugman demonstrates, was the emergence of unions.

A strong union movement, it seems, was able to lock in the new wage norms created by the war for several decades after the war was over. And the rise of unions was clearly linked to politics: first the New Deal, then the war, created favorable environments for union organizing.

Another important element was public policy. Policy, as Krugman and many other economists can attest, can shape a fairer, flatter, more inclusive economy.

What does this tell us about the future of inequality? On one side, it’s encouraging: high inequality isn’t something unavoidable, the necessary consequence of implacable technological forces: political action can create a much less unequal society. On the other side, both the politics of the New Deal and, even more so, the policy environment of World War II, were pretty unique. Progressives are, in general, delighted with how activist the Biden administration is proving; but despite Republican cries of “socialism,” its actions are far more modest than what happened in the ’30s and ’40s.

The big question is how much of the Great Compression we can achieve through less dramatic policies, in a political environment where spending one percent of G.D.P. on infrastructure seems radical. No, I don’t know the answer.

Our ability to fashion public policies that reinvigorate and regrow that all-important, stabilizing middle class depends significantly on a widespread recognition of the economic reality that everyone does better when everyone does better.

Even the most creative entrepreneur cannot innovate and profit in the absence of a supportive physical and social infrastructure and enough people with the wherewithal to pay for his product.

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How To “Gentrify”

Urban planners’ debates about gentrification have been going on for many years. How does a well-meaning local government encourage neighborhood improvement without inadvertently pricing longtime residents out?

If you are reading this in hopes that I have a suggested solution to that dilemma, you’re in the wrong place, although there are certainly some intriguing theories floating about. But there is one approach to upgrading deteriorating neighborhoods that I enthusiastically support. It’s an insight I owe to my husband, from his years as Indianapolis’ Director of Metropolitan Development.

The typical downward trajectory of lower-middle and working class neighborhoods starts with a lack of visible maintenance–houses with peeling paint, unkempt yards, perhaps even broken windows. Lack of maintenance is evidence that leads many disapproving observers to conclude that “those people” just don’t care. My husband’s conclusion was rather different: “those people” were   applying their inadequate incomes to “frivolities” like food, utilities and transportation to work.

What would those neighborhoods look like if we raised the minimum wage to $15/hour? What if desperately poor people, or those on the cusp of poverty, had some disposable income?

There is an often-overlooked connection between economic health and neighborhood revitalization. Regular readers of this blog have read my rants about job creation before, and are aware of my absolute conviction that jobs are created by demand.  The owner of the widget factory isn’t going to hire more people to manufacture his widgets if there aren’t more people willing and able to buy them.

A recent study has added to the already ample evidence for this conclusion–and to the also-ample evidence that “supply-side” economics is, and has always been (as George H.W. Bush memorably labeled it) “voodoo” economics.

“Supply-side” is the economic theory embraced by Reagan and others in the 1980s. That theory dismisses the importance of wages at the bottom of the economy—the demand side. Instead, it rests on the theory that if we “free up” capital at the top—the supply side—wealthy entrepreneurs will create new jobs and a rising tide will lift all boats.

This is the theory that has justified Republicans’ forty-year commitment to tax cuts for the rich. The theory never made sense, and during the past forty years, all evidence has rebutted it. Tax cuts for the rich have never sparked economic growth, although they have certainly made the rich richer.

And that’s what the most recent study has found.

In their study of 18 countries over 50 years,  scholars at the London School of Economics and Kings College concluded that tax cuts do not “trickle down.” In fact, they do little to promote growth or create jobs. Instead, they drive up inequality, by limiting their effects to the people who get the tax cuts.

Focusing on the bottom of the income distribution–ensuring that low-wage workers don’t sink into poverty, that they can afford to put food on their tables, buy diapers for the baby, and see a doctor when necessary (a different but equally pressing issue) and still have funds to fix that broken window and repair the lawn-mower–would do more to “revitalize” neighborhoods than many if not most of well-intentioned government programs. 

Would there still be people who don’t keep their properties up? Sure. Would there still be landlords who are basically stingy slumlords? Yes. But investments in real estate represent a considerable asset to most owners, and the fiscal incentives to protect those investments  by maintaining the properties are strong.

The real lesson behind my husband’s long-ago insight, however, is the holistic nature of our communities, and the importance of not limiting our focus when trying to improve one aspect of our common lives.  We need to recognize the inter-relationships of such things as economic development, job creation and neighborhood improvement.

And “bottoms up” isn’t a phrase limited solely to alcohol consumption.

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A Trillion Here, A Trillion There…

What does the pandemic have in common with income inequality? Both target the same low-income people, and enrich the already-wealthy.

According to Inequality.org, U.S. billionaires have seen their wealth jump over $930 billion since mid-March alone.

If this interminable election season finally ends, and if–as polls suggest is possible (I’m too superstitious to say “likely”)–Democrats take the White House and Senate, that first hundred days is going to be busy. At a minimum, the latest “gift” to the billionaire class, Trump and McConnell’s unconscionable tax act, needs to be reversed. But that’s the minimum.

A September essay in Time Magazine by Nick Hanauer and David Rolf considered just how much that billionaire class has taken from the rest of America.

In this essay, Hanauer and Rolf begin by setting out the extent to which income inequality has hampered America’s ability to deal with the pandemic.

Like many of the virus’s hardest hit victims, the United States went into the COVID-19 pandemic wracked by preexisting conditions. A fraying public health infrastructure, inadequate medical supplies, an employer-based health insurance system perversely unsuited to the moment—these and other afflictions are surely contributing to the death toll. But in addressing the causes and consequences of this pandemic—and its cruelly uneven impact—the elephant in the room is extreme income inequality.

How big is this elephant? A staggering $50 trillion. That is how much the upward redistribution of income has cost American workers over the past several decades.

Hanauer and Rolf go on to explain that the 50 trillion dollar number isn’t some
“back-of-the-napkin approximation.”  A working paper by Carter C. Price and Kathryn Edwards of the RAND Corporation, demonstrated that–had the more equitable income distributions of the three decades following World War II (1945 through 1974) simply held steady–the aggregate annual income of Americans earning below the 90th percentile would have been $2.5 trillion higher in the year 2018 alone. Since 1945, that number is $50 trillion.

That’s $50 trillion that would have gone into the paychecks of working Americans had inequality held constant—$50 trillion that would have built a far larger and more prosperous economy—$50 trillion that would have enabled the vast majority of Americans to enter this pandemic far more healthy, resilient, and financially secure.

Nearly all of the economic growth of the past 45 years was captured by those at the very top of the income distribution. And as Hanauer has repeatedly argued, that extreme disproportion has left millions of Americans with very little disposable income, a situation that hobbles economic growth overall.

It also made us much more vulnerable to the pandemic.

Even inequality is meted out unequally. Low-wage workers and their families, disproportionately people of color, suffer from far higher rates of asthma, hypertension, diabetes, and other COVID-19 comorbidities; yet they are also far less likely to have health insurance, and far more likely to work in “essential” industries with the highest rates of coronavirus exposure and transmission…. Imagine how much safer, healthier, and empowered all American workers might be if that $50 trillion had been paid out in wages instead of being funneled into corporate profits and the offshore accounts of the super-rich. Imagine how much richer and more resilient the American people would be. Imagine how many more lives would have been saved had our people been more resilient.

The article goes through the numbers, including numbers that answer the question “What if American prosperity had continued to be broadly shared?—how much more would a typical worker be earning today? They set out their conclusions in graphs embedded in the article. On average, they concluded that extreme inequality is costing the median income full-time worker about $42,000 a year.

Remember, these calculations would result from keeping former income inequalities static–not engaging in redistribution down, but simply refraining from engaging in redistribution up.

The top 1 percent’s share of total taxable income has more than doubled, from 9 percent in 1975, to 22 percent in 2018, while the bottom 90 percent have seen their income share fall, from 67 percent to 50 percent. This represents a direct transfer of income—and over time, wealth—from the vast majority of working Americans to a handful at the very top.

This situation is bad for the economy, bad for our health and very bad for our democracy. It needs to be reversed.

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Minimum Wage And The Real World

There is evidently a lively argument about who authored the much-quoted observation “It Ain’t What You Don’t Know That Gets You Into Trouble. It’s What You Know for Sure That Just Ain’t So.”

The quotation has been attributed to Mark Twain and Will Rogers, among others, but whatever the source and however folksy the articulation, it counts as real wisdom.

I thought about that very human tendency to cling to verities that “we know for sure” are so when I came across some recent research into the consequences of raising the minimum wage, because for a long time, I was convinced by the (very logical, very persuasive) argument that raising wages would depress job creation.

It turns out there was a logical fallacy in the formulation of the argument that, if employer  had to pay his current employees more, he would have less money available to hire additional workers. That actually would be true–all else being equal.  Those of us who accepted the formulation–including your truly–didn’t realize how much else wasn’t equal.

In the real world, putting more money in the pockets of people who don’t have much disposable income actually increases demand and boosts economic growth.

When something they’ve believed turns out to be wrong, reasonable people change their minds. There’s a difference, however, between ideology and a mistaken belief–ideology is stubborn. It rejects contrary evidence, no matter how convincing.

With respect to minimum wage rates, a number of previous, peer-reviewed academic studies have found little to no impact on hiring as states and municipalities have raised the  wage, casting doubt on the “wage hikes will kill jobs” mantra, but the number of states that have recently raised their minimum wage allowed these recent researchers to draw broader conclusions.

Eighteen states rang in 2019 with minimum wage increases — some that will ultimately rise as high as $15 an hour — and so far, opponents’ dire predictions of job losses have not come true.

What it means: The data paint a clear picture: Higher minimum wage requirements haven’t reduced hiring in low-wage industries or overall.

State of play: Opponents have long argued that raising the minimum wage will cause workers to lose their jobs and prompt fast food chains (and other stores) to raise prices. But job losses and price hikes haven’t been pronounced in the aftermath of a recent wave of city and state wage-boost laws.

And more economists are arguing that the link between minimum wage hikes and job losses was more hype than science.

What we’re hearing: “The minimum wage increase is not showing the detrimental effects people once would’ve predicted,” Diane Swonk, chief economist at international accounting firm Grant Thornton, tells Axios.

“A lot of what we’re seeing in politics is old economic ideology, not what economics is telling us today.”

The doom-and-gloom that opponents have predicted, “are part of the political policy debate,” Jeffrey Clemens, an economics professor at UC San Diego, tells Axios.

His research for the conservative American Enterprise Institute is often quoted in arguments against minimum wage increases.

But Clemens told Axios: “People will tend to make the most extreme argument that suits their policy preferences, and it’s not surprising if that ends up being out of whack with the way things unfold on the ground.”

As part of the study, researchers used Bureau of Labor Statistics data to compare the rate of  job growth in four states with low minimum wages against the rate in eight states with high minimum wages. All 12 states saw growth in restaurant, bar and hotel jobs.
Four states had job growth higher than the U.S. median, and three of them have raised their state’s minimum wage; three of the five states having the slowest job growth kept their wage at the federal minimum of $7.25 an hour.

The bottom line: Opposition to higher minimum wage laws is increasingly based in ideology and orthodoxy rather than real-world evidence, economists say.

The evidence says I used to believe something that just wasn’t so. Given that evidence, I don’t believe it any more.

That isn’t so hard, is it?

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Walmarts Of War

The words used by knowledgable people to describe the size of America’s military budget  range from “bloated’ to “obscene.” The United States spends more on military hardware, troops, bases and the like than most of the rest of the world combined. Even the Pentagon recommends significant cuts, including base closures.

So why doesn’t it happen? Why does Congress routinely vote more money for the Department of Defense than the Department requests?

The answer is in that famous James Carrville motto: It’s the economy, stupid.

Manufacturers who contract with Defense are significant employers in numerous Congressional Districts. Anyone who was paying attention several years ago when there was a round of base closings can attest to the howls of anguish emanating from the local proprietors of businesses that depended upon those defense workers to buy their goods, patronize their bars and restaurants and rent or buy housing.

The reality of that dependence is daunting enough; it has prevented us from paring back a no longer necessary, too-costly war machine that is increasingly focused on fighting the last war. (The Russians are currently demonstrating that cyberwars are much less expensive…) But so long as our tax dollars were supporting a wide range of manufacturers pumping money into an equally wide number of communities, it was possible to understand–if not approve– the justifications offered.

Now, however, we’re just enriching a shrinking number of plutocrats, as Mark Thompson has reported.

The merger mania that surged as the Cold War wound down—when 51 aerospace and defense companies shrank to five—is making a comeback. The “military-industrial complex” that President (and five-star Army general) Dwight Eisenhower warned us of in 1961 has funneled down to a few “Walmarts of war,” as Daniel Wirls, a professor at the University of California, Santa Cruz, quoted defense researchers calling the surviving contractors in a June 26 Washington Post column. Less competition can drive up costs while dampening innovation. Backers counter that efficiencies, job cuts, primarily, lead to lower costs that can save the Pentagon money—rarely—or let it buy more for the same price—also rare. And the middlemen—the lawyers and financiers who nurture these deals—do just fine, thanks.

Thompson detailed the defense mergers, and reported on their consequences.

In May, the Government Accountability Office (GAO) notedthe dire effect of consolidation. Even though the Pentagon has cut four programs from its must-have list, the GAO said, its remaining 82 major programs had grown in cost by $8 billion, to a cool $1.69 trillion. “Portfolio-wide cost growth has occurred in an environment where awards are often made without full and open competition,” the Congressional watchdog agency added. “Specifically, GAO found that DOD did not compete 67 percent of 183 major contracts currently reported for its 82 major programs.” Nearly half of those contracts—47 percent—went the current Big 5: Lockheed, Boeing, General Dynamics, Northrop, and United Technologies (the numbers are even grimmer for taxpayers if supposedly “competitive” bids lead to only a single bidder)….

Worse, the Pentagon pipeline for missiles and munitions is plagued with problems, including “material obsolescence and lack of redundant capability, lack of visibility into sub-tier suppliers causing delays in the notification of issues, loss of design and production skill, production gaps and lack of surge capacity planning, and aging infrastructure to manufacture and test the products,” the report warns. “Production gaps for munitions and missiles directly reduce the U.S. capability to deliver kinetic effects against adversaries.” In October, a second report from the Trump Administration saidthe nation has an increasingly “fragile” defense-industrial base with “entire industries near domestic extinction” and growing reliance on foreign sources.

It is increasingly obvious that the United States needs to rethink virtually all aspects of our approach to national defense–to determine what is really needed to keep the nation safe from foreign attack in the 21st Century, a time when danger comes less and less from state actors and more and more from terrorist cells and internet bots.

The kind of rethinking that is needed will require the best efforts of men and women who are experts in international relations and the intricacies of warfare–not simply military hardware, but strategy and especially the changing nature of the threats we face.

This is a particularly unfortunate time to be governed by corrupt buffoons who have no understanding of government, economics, foreign affairs or science.

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